Welcome to Finance and Fury.

This episode on about how to invest in Asian markets and how to avoid some of the biggest pitfalls in these markets – I have covered the Aus market, and the US market in detail, but haven’t covered much on a giant portion of investments that are available – that is Asian markets

  1. Why would you want to invest?
    1. Number of people in this region is around 4 to 4.5 billion people – or over 50% of the world population
      1. Along with this – comes the companies that provides goods and services to these individuals
      2. Has the potential for market returns – how? Companies performances are based off supply and demand –
    2. Diversification – considered emerging markets –
      1. has growth potential that isn’t as correlated to issues in the west

Countries – and their respective markets – go through the list – some of the market caps may be a little old – hard to get up to the minute data on these

  1. Tokyo Stock Exchange – Japan – June 2020, the exchange had over 3,700 listed companies, with a combined market capitalization of greater than $5.6 trillion
  2. Shanghai Stock Exchange – China – around $6.72 trillion – maybe around 1,200 companies (hard to get estimates)
  3. Shenzhen Stock Exchange – China – $3 trillion market cap – maybe around 1,700 companies (hard to get estimates)

Other nations close to China – HK, Taiwan

  1. Hong Kong Stock Exchange – Hongkong – Market capitalisation was $6.5 trillion at the end of December 2020 – 2,600 shares
    1. Makes sense that this is around the same size as the Chinese markets – go through why in a minute
  2. Taiwan Exchange – Taiwan – $1.5 trillion, 900 listed companies
  3. Singapore Exchange – Singapore – $650 billion – 700 listed companies
  4. Bombay Stock Exchange – India – $2.5 trillion market cap, with 5,500 listed companies
  5. National Stock Exchange – India – $2.5 trillion, 2,000 listed companies
  6. Korea Exchange – South Korea – $2.1 trillion market cap, with 2,400 listed companies
  7. The Stock Exchange of Thailand – Thailand – $500 billion, 600 listed companies
  8. Indonesia Stock Exchange – Indonesia, Jakarta – $600 billion, 700 listed companies

These have been some of the bigger ones – there are plenty more – but in the interest of time – move on

  1. But in total – out of these markets – there is a market cap of just under $32 trillion and 22,000 listed companies available for purchase –
  2. As comparison – Australia’s market cap is around $1.6 trillion USD, with around 2,400 listed companies – so these Asian markets have a market cap around 20 times larger and 9 times the number of companies
  3. Some of the growth potentials over the past few decades may look huge as well – China – probably one of the biggest rises in economic growth and wealth in human history – opening up their free markets – anyone would be crazy to not invest in the Chinese market, right?

However – it isn’t all rosy – Within the Asian markets – there can be many pitfalls – to start with – China is a good example – and how companies that surround China can also be filled with landmines of companies – to start with – a simple explanation of the problem would be to say that China’s listing process on the exchange is over regulated and then beyond this, it is not regulated enough – that is where out of all the markets mentioned above – china stands out for one major reason

  1. Stock exchanges around the world are mostly non-government companies – they are a market place provider – exchange in shares –
    1. Think of these companies as a service providing company – allowing you to buy and sell shares through an exchange – brokerage accounts allow for the transactions to take place – but the exchange itself allows for market pricing – where all brokers, i.e. buyers and sellers can come together
  2. As an example – the New York stock exchange, or the ASX – all regular companies – all ironically listed on their respective exchanges that they provide these services for – you can buy ASX shares on the ASX
  3. In china however – the Shanghai stock exchange is a government agency – the government sees this as a public service which they wish to handle – in theory they are a communist country – in my view, this is only in name – closer to some form of authoritarian country that is not as far left as communism on the economic scale –
    1. In relation to their share market – this does creates a few issues –
    2. The CCP has control over what companies get listed and those that don’t – these companies can earn profits – which is why I don’t think that China is communist in anything but name
    3. There are high levels for barriers to entry to markets in general – there are requirements on listing in every country –
      1. If you want to list on any market in the world – each exchange – i.e. the company that is providing the exchange service as well as the regulator, say for instance the ASX and ASIC – they have their set rules that you need to follow to be eligible to be listed – meet a certain market cap, conduct an audit service –
      2. Have a third party – normally an investment banks do book builds to work out the price of listing and the number of shares – for which they get compensated
  • However – if the numbers don’t stack up, the ASX or this investment bank are liable – both financially through a failed issue (where nobody buys all of the shares available) or legally from ASIC
  1. In China – the government makes the rules – they determine which companies are eligible to list or not –
  2. However – their control goes beyond the listing process, if you as an individual want to buy shares in China – you have to meet the Governments rules –
    1. Not like buying shares on the ASX of in the US or most other markets – I can jump online right now and buy some ASX shares, or shares in the UK, or any other market – but the criteria in China is as follows:
      1. Foreigners with a permanent china residence card or work in china
      2. Foreign employees of a listed A-Share company who currently lives in China or abroad, as long as participating in the companies equity incentives
  • Or be the owner of a corporation that does business globally or in china
  1. Lets just say – the vast majority of people listening won’t meet these requirements – plus Have to go through background checks and no voting powers – don’t want foreign influence – smart in one way – they are familiar with subversion tactics, having engaged in them for decades on other nations – so don’t want the same things to occur against them – but this is limiting the markets capability – of its primary function – rising capital from a wide pool of investors – for this – china probably doesn’t care though
  2. Many of the largest companies listed on the market are state owned for the majority – in other words, the majority of shares i.e. more than 51% are owned by some arm or department of the CCP
  1. So you are limited from actually investing in China – but this being said – would you even want to invest in China?
    1. This market isn’t great as raising capital as previously mentioned – when thinking about supply and demand – if there is a limited capacity of demand – then the price growth potential can be limited – and it is a wild ride
      1. Reached its peak 2008, at about 6,000 points, then crashed down to below 2,000, went through another rise in 2015 to 4,600 points before crashing, today is about 3,600 points
      2. Can see many large companies in china listing overseas – like Jack Ma with Alibaba – wider access to funding –
    2. If you look at the market – most of the companies are state owned companies that have a small portion of equity i.e. shares that an individual can hold
      1. Because their main point is state owned and to provide a service, the performance can be lacking
      2. Especially when comparing the GDP growth compared to the share market growth
    3. Issues with the markets in China and by extension, some other parts of Asia, you don’t know what you are getting
    4. Example – looking at the number one company on the shanghai market – it is number one in market cap by a long way – $2.2 trillion RMB/Yuan ($340 million USD) – In comparison – the Industrial and Commercial Bank of China $1.3 trillion RMB ($200m USD)
      1. Probably going to butcher the pronunciation – but this number one company is called Kweichow Moutai Co., Ltd. is a partial publicly traded, partial state-owned enterprise in China – state owns around 65% of the company
      2. specializing in the production and sales of the liquor Maotai baijiu, together with the production and sale of beverage, food and packaging material, development of anti-counterfeiting technology, and research and development of relevant information technology products
  • The revenues of the company were around $85 billion – but there isn’t a verification process – they are Audited by some Chinese public accountants – the numbers may be accurate – and likely are
  1. But there is an issue with the under regulation of existing investments – especially those down the pecking order but also those listen in other markets around Asia that also don’t require a big 4 accounting firm to do public audits – like we do in Aus
  2. Spoken to a few fund managers who have funds investing in china – they tell some great stories
    1. Some companies have completely fake operations – not
  3. How does this happen – mergers – technically called a reverse merger –
    1. If a company is listed on a market – say in Taiwan – which is considered a freer market – someone in china could set up a false company, with fictitious numbers – nobody is going to check – complete a merger, or buy out 51% of the existing company on another market – you avoid the auditing rules and now you can sell any of the assets held by the company that you bought out
    2. Names of the company can change, then the investment can be pumped and dumped – a boiler room –
  4. This being said – there are plenty of good quality companies with lots of growth potential in other nations outside of China – but how to avoid the trap of buying a remerged company – and how do you access quality investments in Asia –
  5. Depends on how you want to access these investment – now this isnt advice – have to take into account if these investments are in your own best interest
    1. But you can access Asian markets through – ETF or managed funds –
    2. The question remains – Index versus Active – the index of some of these countries does have some issues
      1. Korean market – over 25% of the index is in one company – Samsung
      2. Wouldn’t purchase the Chinese market indexes
    3. Active – depending on nation – many managed funds out there – ones that focus on emerging markets
      1. Advantages of active – can do the research – go into the companies and verify the ownership and the services being provided are real and aren’t just on paper
      2. Can be selective in the shares – as well as markets – can be filled with dud companies
      3. The option to avoid government controlled markets – most of these are also ex Japan (or exclude Japan) – the BOJ owns around $450 billion of shares on the Japanese market –
    4. I have a decent chunk of funds invested in Asian markets – mainly in active managed funds –
    5. For those looking to invest – avoid some of the pitfalls – active managers – finding the right active manager can be hard

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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